The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2016-14 that will change the structure and general financial statement presentation of not-for-profit entities. The goal of these changes is to improve the financial statements to provide more useful information to donors, grantors, creditors, and other users of the financial statements. Below is a summary of the changes:
- Report basic financials by two categories; Net Assets Without Donor Restricted and Net Assets With Donor Restrictions. Currently, not-for-profits present amounts for three categories of net assets (Unrestricted, Temporarily Restricted, and Permanently Restricted).
- If using the direct method to report cash flows, the indirect method (reconciliation) is no longer required.
- In addition to the current requirement to report expenses by functional classifications (i.e. program and supporting activities), the ASU will also require not-for-profits to disclose amounts of expenses by natural classification. This additional analysis of expenses is to be provided in one location on the financial statements, which could be on the face of the statement of activities, on a separate statement or in the notes to the financial statements. Examples of natural expense classifications include salaries and wages, employee benefits, professional services, supplies, interest expense, rent, utilities, and depreciation.
- Enhanced disclosure requirements in the notes to the financial statements how the not-for-profit entity manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the financial statements. The disclosure must also explain how net asset restrictions affect the availability of financial assets at the date of the statement of financial position to meet short-term financial obligations.
The new standards apply to annual financial statements issued for fiscal years beginning after December 15, 2017. Feel free to contact me or any of our accounting and auditing professionals for questions on applying the new standards.
Marc B. Feinstein, CPA